Merger Cancellation the Beginning of the End for Rite Aid?

Rite Aid shares have plunged as the company is headed into an uncertain future after calling off its merger Thursday with the grocer Albertsons.

Analysts and retail insiders questioned the drugstore chain’s prospects after it ended a planned takeover by Albertsons before shareholders could vote on it. That vote also faced shaky prospects due to opposition from shareholders and influential proxy advisory firms.

Chairman and CEO John Standley said in a prepared statement that his company would continue to “build momentum” for big parts of its business like its renovated stores, expanded pharmacy services and its customer loyalty program. Rite Aid also said its board will consider governance changes, although it did not elaborate.

The company also has a pharmacy benefit management, or PBM, operation that runs prescription drug coverage and diversifies its business. But Rite Aid is down to around 2,500 stores mostly on the East and West coasts after selling nearly 2,000 to bigger rival Walgreens Boots Alliance Inc. And it doesn’t operate one of the nation’s largest PBMs like another competitor, CVS Health Corp.

Rite Aid Corp. has neither “the scale nor the balance sheet to compete with much larger and well-capitalized rivals,” Moody’s Vice President Mickey Chadha said in an email.

The Camp Hill, Pennsylvania-based company has struggled with high debt levels and tough competition, as narrowing drugstore networks have pushed customers away from its stores. Earlier this week, it chopped its fiscal 2019 forecast because generic drug pricing also wasn’t shaping up how it expected in April, when it first laid out expectations.

A deal with the owner of Safeway and other grocery brands would have helped the company by creating food and drugstore combinations, and it would have given the chain better access to financial markets for things like opening new stores or improving existing ones, said Burt P. Flickinger III, managing director of the retail consultant Strategic Resource Group. Flickinger has worked with both companies.

He said Rite Aid needs a large investment to help shift its store inventory toward more health and beauty products, like Walgreens and CVS have done, and away from low-margin items like cigarettes that also are prime shoplifting targets.

Flickinger said the Albertsons deal may have been “the last, best, and final opportunity for Rite Aid’s longer term viability.”

Privately held Albertsons Cos., based in Boise, Idaho, was offering either a share of its stock and $1.83 in cash or slightly more than one Albertsons share for every 10 Rite Aid shares. But that offer attracted widespread opposition.

One of the company’s biggest shareholders, Highfields Capital Management, said that deal was “in the best interests of Albertsons and Rite Aid management, but not Rite Aid shareholders.” The investment firm said in June that it would vote its roughly 47 million shares against the deal.

Two prominent shareholder advisory firms — Glass Lewis & Co. and Institutional Shareholder Services — also recommended no votes. Glass Lewis said the deal was “not critical to Rite Aid’s viability” and provided no meaningful premium to investors.

ISS, meanwhile, said it was concerned that the deal would introduce a new set of risks from the grocery business.

Walgreens also had tried unsuccessfully to buy all of Rite Aid in a deal that fell apart last year after encountering regulatory resistance. The Deerfield, Illinois, company then settled for buying a portion of Rite Aid’s stores for about $4.38 billion.

Shares of Rite Aid fell 11.5 percent to close Thursday at $1.54, the stock’s worst sell-off in a year. The decline continued on Friday, dropping another 4 percent during afternoon trading.

The Associated Press contributed to this report.